European Central Bank’s Olli Rehn sees no second-round inflation effects from war shock

Olli Rehn, the Bank of Finland governor and European Central Bank Governing Council member, says the energy-price shock triggered by the Middle East conflict hasn’t bled into the broader economy. Wage growth in the euro area remains moderate, and the feared wage-price spiral that haunted policymakers during previous energy crises hasn’t materialized.

That’s the good news. The less comforting part: Eurozone inflation just jumped from 2.9% in July to 3.3% in August, and oil is trading above $90 a barrel after climbing roughly 25% since the conflict began.

What Rehn actually said

In remarks on August 19, Rehn emphasized that so-called second-round effects, where an initial price shock ripples outward into wages, services, and consumer goods, simply aren’t showing up yet. Inflation expectations remain anchored near the ECB’s 2% target, which is the central bank’s way of saying people still believe prices will eventually calm down.

But he’s not exactly popping champagne either. In a Financial Times interview published September 1, Rehn warned the ECB needs to prepare for a scenario where the conflict drags on, keeping sustained pressure on energy prices.

Rehn has previously described the current economic environment as a stagflationary shock, a term that combines stagnation with inflation. Growth is slowing while prices are rising, which leaves central bankers in the awkward position of needing to fight inflation without strangling an already weakened economy.

The conflict backdrop

The economic pressure traces back to the ongoing conflict involving Iran and the near-complete blockage of the Strait of Hormuz. That narrow waterway handles approximately 20% of global oil and liquefied natural gas exports.

Oil prices surging above $90 per barrel represent a meaningful shock to European economies. The 25% increase since the conflict started has pushed fuel costs higher across the continent, which is exactly what drove August’s inflation reading to 3.3%.

The eurozone has been here before. The energy crisis following Russia’s invasion of Ukraine in 2022 pushed inflation above 10% in some member states. But Rehn is drawing a distinction between that episode and the current one, pointing to the resilience of euro area growth despite the energy headwinds.

What the ECB does next

All eyes are now on the ECB’s September 10 meeting, where the governing council will reassess the inflation outlook. Market participants are pricing in a potential rate hike to 2.5%, which would represent a shift from the easing cycle the ECB had been pursuing before the conflict escalated.